Thursday, April 18, 2024

Why CRA denied taxpayer’s bills for hiring his sweetheart’s mother, spouse

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Jamie Golombek: CRA continuously demanding situations bills when worker in upper tax bracket redirects revenue to low-income circle of relatives member

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Staff are extraordinarily restricted within the kinds of bills they may be able to deduct for tax functions and the foundations are specifically tough for those who’re deducting a wage or different charges paid to an assistant.

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As a up to date case demonstrates, the Canada Income Company would possibly make a decision to take a nearer take a look at your employment expense deduction when the “assistant” you occur to rent is your partner, spouse or different circle of relatives member.

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Wage paid by way of an worker to a circle of relatives member is continuously performed to cut up revenue, particularly if the worker is in a quite top tax bracket and needs to redirect a few of their revenue to a zero- or low-income partner or circle of relatives member.

But if found out, the CRA continuously demanding situations such making plans, and asks the worker to end up the quantities paid to their relative have been “cheap” given the hours (allegedly) labored by way of that relative, and that the quantities have been in fact paid to that exact.

Each problems have been on the centre of the new case involving a Larger Toronto Space automotive dealership supervisor who claimed employment bills of $55,945 in 2015 and $50,793 in 2016 in opposition to roughly $110,000 of annual employment profits.

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The ones bills consisted of $24,000 in assistant’s wage paid to a circle of relatives member for every of 2015 and 2016, and motor car bills (leasing, parking, gas and insurance coverage) of $29,000 in 2015 and just about $27,000 in 2016. He additionally wrote off “place of job provides” consisting of an Apple Watch and an Apple computer, totalling $2,850.

The CRA denied the entire taxpayer’s employment bills and the subject ended up in Tax Courtroom.

The taxpayer defined he employed his sweetheart’s mother in 2015 to perform a little paintings the usage of a house laptop personal computer with a VPN connection to his place of job recordsdata. The paintings concerned finishing and shutting the record on every car sale, hire or financing association as they took place, and incorporated getting into confidential knowledge of each the shoppers and the dealership.

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He testified that given his a large number of obligations on the dealership, he didn’t have the time to do that himself and had to rent any person, equivalent to his sweetheart’s mother, “whom he may just totally believe with this delicate knowledge” to do that paintings previous to submission to the dealership’s accountant for posting.

The taxpayer claimed a deduction of $24,000 in opposition to his 2015 employment revenue for wage paid to his sweetheart’s mother for this paintings. Because it occurs, his sweetheart’s mother lived with him in the similar space, in conjunction with his spouse and children, and, as such, he testified he didn’t in fact pay his sweetheart’s mother the $2,000 per thirty days, however quite “credited the volume in opposition to per 30 days hire for her residing in his space, and in opposition to meals fees and transportation fees to her and unspecified bank card or different fees.”

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Sadly, no documentation corroborating this crediting used to be entered in proof, the volume of the “purported” per 30 days hire used to be no longer mentioned and his sweetheart’s mother didn’t testify. There have been additionally no information as to the hours the sweetheart’s mother labored.

All the way through cross-examination, it used to be prompt the taxpayer’s sweetheart’s mother’s wisdom of English used to be deficient, to which he spoke back that she had had some ESL coaching and that the paintings he had her do didn’t contain realizing English so long as she used to be “in a position so as to add and subtract.”

In 2016, the taxpayer deducted any other $24,000, aside from the assistant he employed this time used to be his spouse. He testified that his spouse used to be paid by the use of per 30 days quantities of $2,000 being deposited right into a joint account held by way of each spouses. In different phrases, there used to be no exact switch of finances to his spouse. No information of bills or hours labored have been saved, and his spouse didn’t testify in courtroom.

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The taxpayer didn't keep records of how much his assistants were paid or how many hours they worked.
The taxpayer didn’t stay information of the way a lot his assistants have been paid or what number of hours they labored. Picture by way of Getty Photographs/iStockphoto

Beneath the Source of revenue Tax Act, as a way to declare a deduction for wage paid to an assistant, an worker should be required to take action by way of the worker’s employment contract, and a finished CRA Shape T2200, Declaration of Prerequisites of Employment, signed by way of the employer, should be bought.

The taxpayer used to be not able to supply any proof that his employment contract required him to pay a wage to an assistant, nor may just he produce a signed T2200 shape for both the 2015 or 2016 tax yr. As well as, no documentary proof used to be submitted supporting exact bills of the alleged $24,000 wage for both yr.

For the 2015 tax yr, the pass judgement on concluded there used to be no proof the taxpayer generally charged his sweetheart’s mother for hire, meals and transportation, so he discovered the $24,000 paid to her as an assistant used to be non-deductible.

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As for the hiring of the taxpayer’s spouse within the 2016 tax yr, the pass judgement on famous, in line with a previous case, that merely having an worker’s wage deposited right into a joint account held by way of two spouses does no longer represent fee from partner A of a wage to partner B “qua assistant.”

The pass judgement on additionally puzzled the reasonableness of the bills in each years. How used to be the yearly quantity of $24,000 decided? It used to be obviously no longer in line with the selection of hours labored. When requested, the taxpayer merely spoke back that $24,000 used to be “what we predetermined.”

The pass judgement on felt that $24,000 yearly for an assistant used to be an “arbitrary quantity and overly beneficiant for part-time hours of laptop computer paintings … (and) used to be no longer cheap … for both yr.”

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The pass judgement on additionally challenged the legitimacy of the taxpayer’s bills for 2 motor cars, a BMW and a Toyota. In courtroom, the taxpayer admitted the Toyota-related automotive fees must be excluded as that car used to be used totally for excitement. As for the BMW, he admitted that handiest 50 consistent with cent of the bills claimed have been business-related. However the taxpayer used to be not able to supply a mileage log for the BMW or any receipts for gas and parking. The pass judgement on denied the whole thing of the taxpayer’s automotive bills.

After all, beneath the heading “place of job provides,” the taxpayer attempted to deduct the price of an Apple Watch and computer. The pass judgement on, except for wondering the private utilization of the pieces, concluded they have been capital bills and thus no longer deductible by way of an worker.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Making plans with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com.

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